EFFECTS OF RELATIONAL GOVERNANCE ON THE PERFORMANCE OF SELECTED BREWERIES IN SOUTH EAST, NIGERIA
This study was conducted to determine the effect of relational governance on the performance of breweries in South East, Nigeria. This study adopted the survey design. Four selected breweries in the South East, Nigeria were used for the study. A sample size of 724 respondents was obtained from the population of 3048 employees and the distributors of these breweries using Freund and William’s statistical formula. Bowley’s method of proportional allocation was used to determine the allocation of questionnaire. The sources of data for the study were primary and secondary. The main instrument used for primary data was questionnaire, which was structured on five-point Likert scale, and also personal interview. Secondary data were obtained from reviewed relevant literature and the internet.
The instrument was checked for reliability and validity using Cronbach coefficient alpha and a value of 0.91 was obtained indicating item consistency. Both the content and face to face validation of the instrument were done by research experts. The data generated from the field survey were presented and analyzed using quantitative method of frequency distribution and simple percentage. The tests of hypotheses were performed using Z-test, ANOVA and Chisquare. The finding revealed that relational governance to a large extent did not positively affect the turnover of breweries in South East, Nigeria; that contractual complexity did not significantly increase the performance of breweries in South East, Nigeria. It was also found that the degree of relational governance significantly increased with the length of time of business interaction; that combining the practices of relational governance and formal
contract in inter-organizational business relationship significantly improved the performance of breweries in South East, Nigeria and that contractual governance and relationalgovernance can significantly function as substitutes in exchange performance in breweries in South East, Nigeria.
From the findings of this study, therefore, it was affirmed that relational governance approach can be beneficial for the effective performance of organizations as it enables goodwill, trust and is beneficial to all stakeholders in inter-organizational business relationship. The study recommends that relational governance approach should be adopted in inter-organizational or inter-personal business relationships where interacting parties have interacted quite some time and proved trustworthy to each other. A combination approach, whereby formal contract and relational governance can jointly be applied in internationalization business relationship, is commendable.
1.1 Background of the Study
Different views have been expressed regarding how corporate organizations should achieve corporate advantage. For Chow et al (2005) and Dyer (1995) corporate organizations cannot just commence the exercise of the proprietary advantage. They hold, rather, that to enhance their ability to compete, they
must work at the complex and sometimes delicate task of establishing corporate relationships with other suppliers. Relating the same view to making foreign direct investment, Chow et al (2005) citing Buckley et al (1976) and (Dyer, 1996) opine that manufacturing firms making foreign direct investments cannot simply enter foreign countries and commence the effortless exercise of their proprietary advantage. Rather, to enhance their ability to compete, they must work at the complex and sometimes delicate task of establishing cooperative relationships with suppliers in host countries. This presents the concept of the inevitability of interaction in organizations. Organizational interaction is inevitable because organizations are viewed as open systems where
objects in their environments influence the behavior of the system’s part and the relationships among its parts.
This is because open systems interact with their environment for the procurement of both inputs and economic resources and to satisfy other needs, which are essential for their survival (Onwuchekwa, 1993). The implication of this is that organizations cannot be completely isolated from their environment. How this interaction should be initiated and sustained for the benefits of the interacting organizations becomes a matter of concern as often duplicity comes into play due to the greed of some business partners’ intention to outsmart each other. This hazardous situation brings up the question regarding the sort of governance arrangement that should be put in place to checkmate business opportunists, who capitalize on the ignorance of their business associates or partners. Poppo et al (2002), therefore, forward the view that transaction cost economics (TCE) has emerged as a common framework for understanding how managers craft governance arrangements. Williamson (1991) holds the proposition that managers align the governance features of inter-organizational relationships to match known exchange hazards, particularly those associated with specialized asset investments, difficult performance measurement or
In response to exchange hazard, managers may craft complex contracts that define remedies for foreseeable contingencies or specify processes for resolving unforeseeable outcomes. Contract constitutes one of the ways managers craft governance arrangements regarding interorganizational
relationships (Poppo et al, 2002). Hill (1990) and Dyer (1997) however hold that there may be occasions when contracts may be costly to enforce. In such occasions managers may choose to vertically integrate. Views have been strongly expressed that transaction cost economics overstates the desirability of either integration or explicit contractual safeguards in exchange settings commonly labeled as hazardous. This view recognizes that in many industries managers engage in complex, collaborative market exchanges that involve rather high levels of asset specificity that are characterized by other known hazards(Dyer,1997). River ( 2010), reflecting on the evolutions that are going on in business interaction, is of the view that the ways business and government customers and service providers manage long term, complex services contracts have undoubtedly undergone a paradigm shift in recent years. So, rather than entering into a transaction defined by legally binding terms, parties now purposely enter into a loosely defined cooperative relationship intended to produce business outcomes like more cost efficient operations or increased competitive advantage in the market place.
Still arguing against formal contract, River (2010) cites the views of the management consulting firm, Vantage Partners, that scholars in the fields of management and information system sciences argue that contracts and the negotiation process undermine outsourcing governance for several reasons.
These reasons include that contract negotiations and reliance on terms create distrust between customer and provider, whereas governance is based on the existence of trust. Also the specification of service terms induces the moral hazard of not doing what is not written in the contract, while governance promotes it. Creating detailed, complex contracts inhibits the free exchange between customer and provider that is at the heart of governance. The net effect of relying on both contracts and governance to manage outsourcing, River (2010) holds, is a negative one.
As a substitute for the complex and explicit contracts or vertical integration, therefore, relational norms such as trust are recommended (Bernheim and Whinston, 1998; Dyer and Singh, 1998; Adler, 2001). This reasoning views trust and its underlying normative behaviors as operating as a self-enforcing
safeguard, that is, a more effective and less costly alternative to both contracts and vertical integration (Hill, 1990; Uzzi, 1997). Formal contracts are often held to be undermining a firm’s capacity to develop relational governance and may signal distrust of your exchange partner and by undermining trust encourage, rather than discourage, opportunistic behavior (Fehr and Gachter, 2000). Poppo et al (2002) also argue in support of the opinion that formal contracts actually undermine trust and encourage the opportunistic behavior which they are designed to discourage. These critiques of formal contracts view relational governance as a substitute for formal contracts. In the presence of relational governance, they hold that formal contracts are at best an unnecessary expense and at worst counter-productive and that relational exchange arrangements supported by trust are commonly viewed as substitutes for complex contracts in inter-organizational exchanges.
Discussing relational and formal contracts in China, Zhou et al (2003) hold that countries with legal systems have courts to enforce contractual provision but interestingly in emerging economies such as China, in which the legal system is weak, the use of contracts is still prevalent. Also conventional
institutional analysis suggests that emerging economies will translate from personal connections to rule-based institutions that support impersonal market exchanges. Similarly, the efficiency logic of transaction cost economics indicates that in market exchanges, contracts mitigate some of the inefficiencies that arise from exchange hazard, namely asset specificity and uncertainty (Williamson, 1996). Reiterating why formal contracts have not gained much ground in China, Boisot and Child, (1996) and Child et al (2003), counter that social institutions, which have governed exchange in China through norms and obligations for thousands of years, impede a reliance on the development of, and the use of formal institutions such as legal system and contract law with their efficiency-based logic for coordinating exchange.
They express surprise that the use of contract is still prevalent in China despite the impacts of norms and obligations. Poppo et al (2007), posit that managers may be willing to modify contracts because relational governance gives them some assurance that both parties will honour the formal agreement and its intent and that relational practices further enforce the use of contracts as a framework for adaptation. For relational governance to thrive successfully, MacNeil (1978) suggests that exchange of information should be adopted as it will enable the involved parties to have better information about each other than any third party when adapting to unexpected exchange. As complementary relationship may also function in reverse, the continuity and cooperation encouraged by relational governance may generate contractual refinements that further support greater
. Also relational governance may heighten the probability that trust and cooperation will safeguard against hazards poorly protected by the contract. This may help overcome the adaptive limits of contracts: a bilateral commitment to ‘keep-on-with-it’ despite the unexpected complications and conflicts (Poppo et al, 2002). Following the logic of transaction cost economics view, it is the manager’s task to craft governance arrangements with minimal cost that ensure the delivery of the desired quantity, price, and quality of a supplier’s services. The manager, therefore, crafts governance arrangements to match the exchange conditions that accompany various services. As exchange hazards arise, so must contractual safeguards (Williamson, 1985), which act to minimize the costs and performance losses arising from such hazards. As crafting a complex contract is costly, parties undertake such a cost only when the consequences of a contractual breach are considerable (Joskow, 1988; Heide, 1994).
Transaction cost economics scholars also put forward three categories of exchange hazards, which necessitate contractual safeguards or vertical integration. These are asset specificity, measurement difficulty, and uncertainty. Asset specificity emerges when sourcing relationships require specific
investments in physical and/or human assets. The presence of these specific assets transforms an exchange from a world of classical contracting in which the ‘identity of parties is irrelevant’ into a world of neoclassical contracting in which the identity of exchange partners is of critical importance
(Williamson, 1991). The observation by many scholars, including transaction cost economists, is that the governance of inter-organizational exchanges involves more than formal contracts. Inter-organizational exchanges are typically repeated exchanges which are embedded in social relationships. Here governance emerges from the values and agreed-upon processes found in social relationships (John, and Nevin, 1990; Heide and John, 1992), which may minimize transaction costs as compared to formal contracts (Dyer, 1996; Dyer and Singh, 1998).
From such relationally-governed exchanges occur the enforcement of obligations, promises, and expectations through social processes that promote norms of flexibility, solidarity, and information exchange. Flexibility facilitates adaptation to unforeseeable events. Solidarity promotes a bilateral approach to
problem solving, creating a commitment to joint action through mutual adjustment. Information sharing facilitates problem solving and adaptation because parties are willing to share private information with one another, including short and long-term plans and goals. As the parties commit to such norms, mutuality and cooperation characterize the resultant behavior (Poppo et al, 2002). For Gulati (1995b: 93), trust avoids contracting costs, lowers the need for monitoring, and facilitates contractual adaptation. Trust counteracts fears of opportunistic behavior and as a result, is likely to limit the transaction costs associated with an exchange.
This means that trust can substitute for contracts in many exchanges. Uzzi (1997) however holds that the embedding or fixing of exchanges within social structures circumvents and thus economizes on time otherwise spent in costly contract renegotiation, while Larson (1992) argues that formal contracts are rather unimportant in the exchange agreements examined. Poppo et al (2002) also opine that informal social controls push formal contracts to the background. If one party trusts the other, there is simply little need for contractually specifying actions and that relational governance lowers transaction costs and facilitates adaptive responses. Another additional reason for substitution adduced by scholars is that formal contracts may actually
undermine the formation of relational governance. Ghoshal et al (1996), on the other hand, argue that the use of rational formal control has a harmful effect on cooperation. They assert that for those parties being controlled, the use of rational control signals that they are neither trusted nor trustworthy to behave appropriately without such controls.
The controller may develop negative feelings which arise from the dilemma of the supervisor, which means the situation when the use of surveillance,
monitoring, and authority leads to management’s distrust of employees and perceptions of an increased need for more surveillance and control (Ghoshal, 1996: 24) Contracts and contract law may not be necessary in many situations because their use may be thought to have undesirable consequences because detailed negotiated contracts can negate good exchange relationships between business units (Macaulay 1963). Macaulay (1963) also argues that why some firms discourage the use of an elaborate contract is because it is a pointer to a lack of trust and blunts the demands of friendship, turning a cooperative venture into an antagonistic horse-trade and that consistent with a formal model and making contracts explicit may encourage opportunistic behavior surrounding actions that cannot be specified within contracts.
In summary, Poppo (2002) and some scholars view relational governance and formal contracts as substitutes, which operate through one of two mechanisms. Either relational governance eliminates the need for formal contracts and vice versa, or formal contracts directly hinder the formation of
relational governance. While relational governance and formal contracts have positive direct effectson exchange performance, because they function as replacements for one another (or in the case of formal contracts causally damage the other), the net effect on exchange performance is, at a minimum, reduced potentially negative. On the other hand, most transaction cost economics (TCE) examined the characteristics of transaction-specific investments in the light of their impact on governance mechanisms (William, 1985). Here transaction-specific investments are treated as an exogenous variable (Heide and John 1990; Joskow 1987). The major proposition, along this line, is that manufacturing firms are asked to offer contracts to safeguard suppliers’ specialized investments.
Bensaou et al (1999) hold that when contracts cannot provide the necessary safeguards, manufacturing firms are forced to engage in vertical integration to mitigate suppliers’ lock-in hazards. In practice, however, given that transaction-specific investments are necessary; many transactions
exist outside the realm of vertical integration or contracts. One possible reason for this according to Bensaou et al (1999) is that relationships based on trust lessen the chance that vertical integration will be used to protect transaction-specific investments. An ongoing relationship generally fosters trust and
enables partners to adopt more flexible models of cooperation such as alliances, creates value together that is mutual benefits or reciprocity, and, eventually induces suppliers to make transaction-specific investments (Chwo et al, 2005).
The above exercise aligns with the proposition of Zajac (1993) and Claro et al (2003) that over the last decade, researchers have been examining the impact of governance mechanisms on the value creation initiatives of exchange partners but the conditions that enable transaction-specific investments have received less attention. Also architectural interdependence, complexity, the thinness of the supplier market, and the scope of a relationship, all influence investments (Bensaou et al, 1999). Most of the research works done on formal and informal contracts as evidenced in this introduction show that the emphasis of the researchers have been on various governance mechanisms (Chwo-Ming et al, 2005), their operations, their relationships as regards whether they can substitute or complement each other or be used as alternatives (Poppo et al, 2002), or their impacts on the contracting organizations’ relationship or the asymmetric benefits of relational governance (Gopal et al, 2008). Works still need be done to find out the effects of these governance mechanisms on organizational performance.
This need arises because organizations and their managers tend to be judged on their performance in terms of business outcomes (turnover, profits, return in investment), in terms of their agreed departmental \ unit objectives and in terms of how they have performed generally in carrying out theirresponsibilities s stated or implied in their job description (Cole, 2004). Following this line of thought, therefore, it becomes necessary to examine the effects of relational governance and the roleof trust on organizational performance.
EFFECTS OF RELATIONAL GOVERNANCE ON THE PERFORMANCE OF SELECTED BREWERIES IN SOUTH EAST, NIGERIA
1.2 Statement of the Problem
Inter-organizational relationship is a sine qua non (unavoidable relationship).This is because organizations are viewed as open systems. Objects influence the behavior of the system’s part and the relationships among its parts. An open system interacts with its environment for the procurement of
both input and economic resources and to satisfy other needs, which are essential for its survival. The procurement of these inputs and economic resources or the exchange of technology involves either written or unwritten agreement. These agreements are meant to ensure that the parties in interorganizational relationship discharge the agreed responsibilities to the benefit of all the stakeholders. Unfortunately, these agreements sometimes end up in fiasco due to one party’s failure to fulfill the terms of the agreement. Even in the face of legally-backed contracts, organizations have experienced
disappointments, which made nonsense of the said law. People have undertaken contracts they are aware they cannot execute only to abscond with the mobilization fees.
The same is observable in cases where vendors undertake to either supply raw materials or market finished goods for a manufacturing firm only to disappear with the advanced payments made to them or fail to make the expected returns to the firm despite agreements reached or contracts signed. Unfinished projects are scattered all over Nigeria despite elaborate contractual agreements. These include road projects, buildings, firms and factories, farm projects et cetera. If these projects were executed the problems of unemployment and poverty could have been reduced to the barest minimum. Diseases and hunger are taking their great toll on the masses due to myriads of unfulfilled contracts as well as uncompleted projects, which have become the abode of rodents, venomous serpents as well as hiding places for criminals. There are lots of contracted and sometimes commissioned unfinished projects. Are the problems on contracts signed or the persons, who award the contracts or those to whom the contracts are awarded or the processes of awarding the contract? Can there be alternatives to the formal contractual procedure to remedy these observable lapses so as to optimize the benefit of inter-organizational and inter-personal relationships?
EFFECTS OF RELATIONAL GOVERNANCE ON THE PERFORMANCE OF SELECTED BREWERIES IN SOUTH EAST, NIGERIA